We expect challenging times ahead for casual dining operators impacted by cost pressures at the same time as consumers face a squeeze on disposable incomes. However, changes in consumer tastes and the way diners engage with restaurants, alongside increasing use of technology, provide opportunities for growth if properly harnessed – Deloitte, The UK Casual Dining Market
The news last month that Jamie Oliver’s empire of casual dining restaurants had collapsed into administration was a surprise. Oliver is one of the best known chefs in the world and has been for close to two decades now. Television shows starting with ‘The Naked Chef’, numerous best-selling cook books and high profile campaigns for healthier eating mean he is one of the most recognisable, and popular, personalities in the UK. He also has a significant profile internationally.
It isn’t particularly news that ‘the high street’ is going through a tough period as ecommerce and tightening disposable incomes have hit bricks and mortar footfall. These travails are generally most associated with bricks and mortar shops, not restaurants. Especially not those under the franchise of such a well-know and widely respected name.
But the failure of even Jamie Oliver’s restaurant business now looks like the canary in the coal mine even if there have been accusations of less than perfect management behind the group. The restaurant business, especially the ‘casual dining’ sector, is changing. And many of the restaurants and chains that the market is made up of are struggling.
British consumers feeling the pinch over the last couple of years in terms of their disposable income is certainly one factor. But there is another that also shouldn’t be overlooked – technology and the digitalisation of the casual dining market. It is becoming more and more common to eschew an evening out at a restaurant to order food to home through apps such as Deliveroo and Uber Eats.
Google is now getting in on the act too. The search engine giant has recently introduced an ‘Order Online’ button to restaurant listings and the Google Assistant voice search function in the USA and India markets. It allows users to choose and order food from restaurants without ever leaving the Google search environment (ie. without clicking through to the restaurant itself). That order is passed through to one of a select group of delivery app partners for fulfilment. It can be expected that the new Google functionality will be rolled-out in the UK sometime soon.
Food Delivery Apps Have Become Big Business
Digital food ordering platforms such as Deliveroo and Uber Eats have proven a big hit. They offered a convenient way to order food from a huge selection of restaurant partners from one digital place, with delivery and payment details already filled in, stored and orders able to be made with just a few clicks. Throw in the added reassurance of being able to read the now standard peer reviews of other hungry customers and it’s a winning combination for the user.
Global market revenue of service delivery platforms from 2014 to 2019 (in million U.S. dollars)
The market is growing quickly as the chart above demonstrates but still has plenty of space left for that fast pace of growth to continue. Statista still classes the Platform-to-Consumer Delivery sub-segment as a “very immature market” that accounted for just 19% of total revenue within the Online Food Delivery segment in 2018. The remainder was direct Restaurant-to-Consumer deliveries. But the balance is quickly changing. And the nimble tech start-ups in the space have quickly grown.
In the UK the market leader is Deliveroo has attracted total investment of over $1.5 billion after it last month closed a $575 million round led by no less an investor than Amazon. Amazon has itself had a less than successful venture into the space through Amazon Restaurants, launched in 2015. However, the service pulled out of the UK last year and is currently only available in 25 U.S. cities. The new strategy appears to be Amazon’s stake in Deliveroo and its cash injection is expected to be used for further international expansion, particularly in the USA, where the UK start-up will take the fight to Uber Eats.
Deliveroo has reportedly turned down outright acquisition approaches from both Uber and Amazon but has now sided with Amazon, albeit as a minority stakeholder. The company is now thought to be valued at between £2 billion and £3 billion. London-listed Just Eat has a market cap of over £4 billion.
In Europe, the segment’s market leaders are Amsterdam-listed Takeaway.com (market cap £3.7 billion) and Delivery Hero. Germany-based Delivery Hero is currently much bigger than even Deliveroo and has a valuation approaching £7 billion having listed on the Frankfurt Stock Exchange in 2017. Delivery Hero operates in 40 countries and counting to Deliveroo’s 14 and has circa. 250,000 restaurant partners to Deliveroo’s 60,000. Another Berlin-based delivery app, Foodora, has been acquired by Rocket Internet.
In the USA, GrubHub and DoorDash are Uber Eats’ biggest challengers, for now. DoorDash has recently raised $2bn from SoftBank and others, including a $600m injection last month valuing it at $12.6bn. In China, Alibaba-backed Ele.me and Tencent-backed Meituan are duking it out and Swiggy leads the market in India.
They are a host of delivery app companies valued in the hundreds of millions to billions and which continue to grow rapidly. Future years can be expected to see a level of industry consolidation and several failures. Competition is fierce.
Have Tech Companies Been The Casual Dining Sector’s Sirens?
On the face of it, food ordering apps and platforms also looked like a win-win for restaurants and fast-food outlets. They promised to open up a new revenue stream for casual dining restaurants – building up a delivery business that meant they could potentially sell far more meals than they had seating capacity, particularly at peak times.
Also, unlike the first generation of online restaurant and take-away aggregators, of which JustEat is the biggest, restaurant partners don’t need to make the deliveries themselves. So not only no need to invest in the huge overhead of moving to larger premises or building out an online platform to take orders. Restaurants also don’t need to hire delivery drivers and coordinators to tap into the revenue opportunity.
Everything is ‘plug-and-play’. Sign a contract, spend a few hours uploading the menu and other details, wait for the orders to roll in and simply package them up for delivery rather than putting them on plates for the waiting staff to deliver to tables. Casual dining restaurants were, understandably, generally happy to get onboard the delivery app train.
But many are now starting to realise the call of the well-funded tech start-ups has, from the point of view of the casual dining restaurant, a sinister side. Sales aren’t actually going up. The Times newspaper reports that in Britain, restaurant sales have remained flat even as app delivery turnover has surged from virtually nothing five years ago to £5bn a year. But with the delivery apps taking up to 30% on orders made through their platforms, restaurants are having to work harder to make the same amount of money.
They have to somehow compensate for the commission they pay for the orders from delivery apps, which is a lot to claw back even if packing meals for pick-up and delivery means tables don’t have to be waited. And casual dining restaurants make far better margins on drinks than they do on food. While some orders include drinks, most don’t. Why pay £20+ for the same bottle of wine available for £6.99 in the local convenience store? Those margins are lost when orders are made through delivery apps.
What’s Next For Delivery Apps and The Casual Dining Market?
The threat that delivery apps pose to traditional bricks-and-mortar restaurants is growing. At this point in time, they are all pretty much loss-making. The market segment is in a ‘land grab’ phase with the contenders offering the end consumer super low delivery fees and often none at all.
At the same time, they are putting significant pressure on restaurant partners by charging them fees many feel they have little choice but to pay despite struggling to retain a commercially viable margin after them. With market penetration strategies that are heavily reliant on ‘spending each other into oblivion’ there is a further risk when some delivery apps inevitably lose their war and fail.
Payments often go through the apps, who then retain their cut and pass the rest onto the restaurant partner. But usually at the end of the month. For many independent restaurants, and even hard pressed chains, a delivery app going belly up while potentially owing them thousands to tens of thousands could easily be a death knell.
Beyond that, the even greater risk to the traditional restaurant sector is that delivery apps are moving into vertical expansion mode in their effort to cut losses and move into profit. A key part of that is investing in ‘dark kitchens’. Also referred to as ‘cloud’ or ‘ghost’ kitchens, dark kitchens only serve delivery customers. They use a combination of advanced food preparation, underused real estate and algorithm-driven optimisation to lower overheads and increase output.
This new ‘dark kitchen’ market can be split into two spheres. Dark kitchens owned directly by delivery apps.
Deliveroo has stated it will invest a significant chunk of its Amazon windfall into dark kitchens. And companies selling through delivery apps as dark kitchens rather than restaurants. There’s a third niche sitting between the two spheres – companies that invest in setting up dark kitchen facilities that are rented out on demand. A bit like the WeWork of the restaurant, catering and food delivery market.
Jim Collins, chief executive of Kitchen United recently told the Financial Times why the model is growing so quickly along with food delivery apps and why it is such a threat to traditional restaurants:
“Most quick-service restaurant chains employ 30 to 50 people. In our facility, we have designed the service stack so they only need two people per shift. It cuts their labour cost by 75-80 per cent.”
A further advantage of the dark kitchen infrastructure is that consumers get hotter, fresher meals faster. They perform the same role in the supply chain as logistics warehouses in the online order and delivery of consumer goods. It’s no coincidence Deliveroo’s Amazon tie-up marks its foray into dark kitchens.
Anton Soulier, a former Deliveroo executive who left in 2017 to found ‘Taster’, a dark-kitchen based start-up he believes can create brands as recognisable as a Dominos or McDonalds within the food delivery-platform ecosystem says:
“The beauty of the model is restaurants and food are the least scalable business in the world. We are trying to make it more scalable and expand very quickly.”
Taster uses algorithms to forecast each week’s sales and order patterns to optimise ingredient purchases. With these efficiencies costs can be brought well below those traditional restaurants can offer, without necessarily compromising the quality of the end product. Built for delivery from the ground up, quality should actually improve.
Perhaps the most ominous quote of all, and one that even grocery stores should perhaps worry about, is a statement made by Bob van Dijk of Naspers, an internet group with significant investments in the food delivery app market, including stakes in Delivery Heroes and India’s Swiggy:
“A hundred and fifty years ago, most people made their own clothes. I’m fairly convinced that 20 years from now, we will mostly not make our own food.”
The Way We Eat Will Change And So Will The Food Business
Restaurants won’t of course cease to exist. Eating is a social experience and there will always be demand for social settings in which groups can gather to ‘break bread’ together. But there is strong reason to suppose that the growth of the food delivery platforms and app market will mean the end of the boom times for casual eating restaurants they have enjoyed over last couple of decades.
The supermarket and convenience store market for groceries should also be nervously looking over its shoulder. If it costs just 20%, 30% or even 50% more to order and be quickly delivered high quality, ready-made meals compared to cooking ourselves, will we really continue to do our regular supermarket shop and spend hours a week cooking? If the price model is right, Mr van Dijk could well be right and cooking ourselves becomes an occasional special event rather than a standard.
The advent of food order and delivery platforms looks like it will, 10 or 20 years from now, mark the beginning of the tech disruption of our food and eating patterns. A large swathe of the market for casual eating restaurants looks set to be the first victim of that disruption and much of the rest of the current business of food could well follow.